Euro Rebound Provides Selling Opportunity, Sterling Looks For Support

DailyFX

Mar. 12, 2012, 9:10 AM

The U.S. dollar regained its footing on Friday following the above-forecast Non-Farm Payrolls print, and the rebound in the reserve currency may gather pace over the near-term as the more robust recovery limits the Fed's scope to push through another large-scale asset purchase program.

Talking Points

Euro: Greece's CAC Triggers CDS, Third Bailout Not Ruled Out

British Pound: Fails To Hold Range, 50.0% Fib In Sight

U.S. Dollar: FOMC To Soften Dovish Tone, Talk Down QE3

Euro: Greece's CAC Triggers CDS, Third Bailout Not Ruled Out

The Euro pared the overnight decline to 1.3078 even as the International Swaps & Derivatives Association said Greece's implementation of the Collective Action Clause would trigger a credit event, and short-term rebound in the exchange rate may provide as selling opportunity for FX traders as we expect the single currency to face additional headwinds over the near-term. Nevertheless, the People's Bank of China reiterated its support for the region said the government will continue to invest in euro-area despite the ongoing turmoil in the financial system, but the heightening risk for contagion instills a bearish outlook for the EURUSD as European policy struggle to restore investor confidence.

Indeed, market participants are now turning their attention to Portugal as the government continues to face high financing costs, but it seems as though more will need to be done in Greece as German Finance Minister Wolfgang Schaeuble warned that the EU should not rule out a third bailout package for the troubled economy. In turn, we may see the European Central Bank continue to shore up the banking system in 2012, and the Governing Council may have little choice but to push the benchmark interest rate below 1.00% as the fundamental outlook for the region turns increasingly bleak. As the EURUSD looks to be completing a head-and-shoulders top, the pair looks poised for a major selloff in the coming days, and we may see the exchange fall ultimately back towards the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2630-50 to test for near-term support.

British Pound: Fails To Hold Range, 50.0% Fib In Sight

The British Pound slipped to a fresh monthly low of 1.5606 as market participants scaled back their appetite for risk, and the sterling may face additional headwinds during the week as the economic docket is expected to reinforce a weakened outlook for the U.K. As the GBPUSD fails to maintain the range-bound price action carried over from the previous month, the pair should continue to give back the advance from earlier this month, and we may see the exchange rate come up against the 50.0% Fib from the 2009 low to high around 1.5300 to test for support. As we continue to track the downward trend in the relative strength index, the oscillator supports our bearish view for the GBPUSD, but we may see market volatility thin ahead of the Bank of England Minutes due out on March 21 as market participants weigh the outlook for monetary policy.

U.S. Dollar: FOMC To Soften Dovish Tone, Talk Down QE3

The greenback extended the advance from the previous week, with the Dow Jones- FXCM U.S. Dollar Index (Ticker: USDOLLAR) rallying to a fresh monthly high of 10,011, and the reserve currency should continue to retrace the decline from earlier this year as the fundamental outlook for the world's largest economy improves. Indeed, we may see the Federal Open Market Committee continue to soften its dovish tone for monetary policy amid the slew of positive developments, and we may see the central bank raise its fundamental assessment for the region as the recover gets on a more sustainable path. In turn, we may see the USDOLLAR track higher going into the middle of the week, and the index may make another run at the 78.6% Fib around 10,118 as market participants scale back expectations for another round of quantitative easing.